Tax Type
Retail Sales and Use Tax
Description
Audit procedures; Sample purchases
Topic
Collection of Delinquent Tax
Date Issued
08-20-1996
August 20, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***********
This is in response to your letter of April 8, 1996 in which you seek correction of a sales and use tax assessment issued to********(the "Taxpayer") for the period August 1992 through July 1995. I note that the entire assessment has been paid.
FACTS
The Taxpayer operates primarily as a site contractor providing improvements to real property. These services generally include grading, excavating, paving and related services. The Taxpayer also operates a mulch yard from which sales of mulch are made.
The assessment in the instant case was made for untaxed sales and untaxed purchases. The Taxpayer protests that portion of the assessment related to untaxed sales of fixed assets which the Taxpayer suggests are exempt occasional sales. Also under protest is the tax on miscellaneous sales of sod and silt fencing as well as certain purchases which were included in the audit's extrapolated sample. Each of these issues will be addressed separately below.
DETERMINATION
Asset Sales: As a large real property contractor, the Taxpayer uses an extensive amount of equipment in addition to a significant amount of computer and office equipment. These assets are sold from time to time as they become antiquated or are no longer fully effective for the Taxpayer's purposes. You contend that given the Taxpayer's size and its large base of equipment, the sale of assets is rare and therefore should be deemed exempt occasional sales.
Code of Virginia § 58.1-609.10(2) provides an exemption from the tax for an "occasional sale." That term is defined in § 58.1-602 to mean:
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- A sale of tangible personal property not held or used by a seller in the course of an activity for which he is required to hold a certificate of registration, ... provided such sale ... is not one of a series of sales and exchanges sufficient in number, scope and character to constitute an activity requiring the holding of a certificate of registration. (Emphasis added)
The department has issued Virginia Regulation (VR) 630-10-75 to further address these statutes. The regulation reiterates the"number, scope and character" criteria of the code and also provides that an occasional sale means a "sale by a person who is engaged in sales on three or fewer occasions within one calendar year."
It appears that the Taxpayer regularly engages in making sales of tangible personal property. In addition to regular sales of mulch, the Taxpayer has made a number of asset sales throughout the audit period. For example, asset sales were made to customers outside Virginia. These were not assessed because they qualified for the interstate commerce exemption under Code of Virginia § 58.1-609.10(4). Nevertheless, it is evident that the number of asset sales exceeds the "three or fewer" restriction set out in VR 630-10-75. While I understand the Taxpayer's concern given its size, the volume of sales in this case represent a series of sales "sufficient in number, scope and character" which removes those sales from the exemption.
I can also find no provisions in the law which would allow the department to administer the occasional sale exemption based on the Taxpayer's size and the amount of equipment which it uses. Indeed, the department strives to administer the tax on a uniform basis regardless of a business's size and the volume of its business activity.
Miscellaneous Sales: The Taxpayer was assessed the tax on sales and installation of sod and silt fence (which is installed in an effort to control ground erosion). In most cases, these items are furnished as part of the Taxpayer's real property contracts. Less frequently, these sales are made independent of the contracts. For example, these items may be sold as part of additional work for an already closed contract or for start-up work on potential contracts which are still in negotiation.
VR 630-10-40(A) and (B) indicate that the tax applies to the retail sale of shrubbery, sod, and similar items. A person making such retail sales is required to apply the tax to the total charge, except that separately stated charges for transplanting are not taxable. That same regulation, under Section (C), also provides that:
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- Any landscaper, nurseryman, or contractor who goes beyond the sale and planting of shrubbery, sod, etc. and contracts to grade, seed and fertilize lawns ... is deemed to be a consumer of all tangible personal property used in performing such service and must pay the tax on such property at the time of purchase. The charge to the customer for providing the service is not subject to the tax.
In the instant case, the Taxpayer generally provides sod and silt fencing as a using and consuming contractor as addressed in VR 630-10-40(C). In other instances, however, when such items are sold outside of its grading and other real property contracts, the Taxpayer is deemed to be retailer as addressed in Sections (A) and (B). Accordingly, the assessment of the tax on the sale of these items is correct.
I understand your concern that the Taxpayer's sales of sod and silt fencing are made either in anticipation of negotiating a real property contract or for work performed subsequent to completing a real property contract. Nevertheless, allowing the Taxpayer to make such sales without charging and collecting the tax would be contrary to a well--established regulation. Such a determination would also put the Taxpayer at a competitive advantage over those businesses which are required to charge the tax to their customers.
Sample Purchases: The Taxpayer has identified a number of purchases made during the sample period which were assessed and used to extrapolate an assessment for the entire audit period. The Taxpayer does not dispute that these purchases are in fact taxable, but maintains that they are not representative of the entire audit period. The transactions include: (1) mulch withdrawn from inventory and used by related parties; (2) fish for stocking a pond purchased on behalf of a related party; and (3) the conversion of data files made in connection with the implementation of a new software package.
Despite the Taxpayer's contentions, I can find no basis for the removal of these protested items from the audit sample. The courts have held that a tax assessment is prima facie correct and the burden is upon the taxpayer to prove that the assessment is incorrect. Based on the information before me, the Taxpayer has not met this burden.
For an item to be removed from the audit sample, the Taxpayer must show that the transaction was isolated in nature and not a normal part of the Taxpayer's operation. It may well be that purchases in connection with data conversion are infrequent, but such purchases appear to be an integral part of the Taxpayer's business activity.
Nor do I agree that removing the other transactions is warranted in this case, especially noting that three such transactions were made within the sample period. The purpose of the projection is to account for likely transactions on which the Virginia tax was not properly paid. The removal of the principal-related transactions would nullify the purpose and validity of the sample in that other purchases may not have been properly taxed.
Based on the above, I find that the assessment is correct, and I hope that you find this information useful in understanding the basis for that assessment. If you have any questions, however, please contact ******** in my Office of Tax Policy at ********* .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11160I
Rulings of the Tax Commissioner